Morning Commentary: The British Pound – On the Ropes
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The British Pound – On the Ropes
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Alan Rose Foreign Exchange Senior Trader
As we arrive this morning, markets are continuing to recalibrate the effects of Friday’s stellar U.S. jobs report on Fed policy going forward. Markets hopefully will gain new insight into Fed policy as Fed Chairman Powell’s semi-annual testimony before Congress will begin tomorrow. Most of the markets movements over the past 48 hours are correcting all the hyper-euphoria surrounding the expectation of future Fed rate cuts. Equities continue to correct lower, G7 interest rates are steady to higher for the third day in a row, and the U.S. dollar (DXY) is up for third day in a row.
In the background of all this re-thinking of U.S. monetary policy, the British pound remains under pressure. It has fallen in six of the past seven sessions, and it is the weakest of the major currencies over the last month and over the past three months (-4.60%). The GBP is challenging its lowest levels of 2019. There are numerous reasons for this continued pressure of which most center on the politics and final outcome of the Brexit negotiations. But, there is more to this story than just Brexit.
The U.K. continues to face a challenging external accounts position with a widening trade deficit and current account deficit. The U.K. faces the uphill task of generating enough capital inflows to fund the largest current account deficit in the developed world while at the same time offering investors lower real yields. U.K. GDP growth rates have been on the decline, and it appears that the market consensus is building that a weaker GBP is in the cards to reflect all this uncertainty; a weaker GBP is one of the few levers left to help stimulate growth, and the market seems to be accommodating that proposition.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The Aussie dollar is the weakest major currency today and has now fallen four straight days after surging since the middle of June. A sharp fall, from seven to two, in the key NAB June business confidence index has mainly triggered today’s decline in the Aussie dollar.
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